Priority to intermediate imports of capital goods – CB

The government and the Central Bank have ensured that trade is not unduly disrupted and that imports of intermediate goods and equipment are given priority over imports, Central Bank Governor Professor WD Lakshman said. government’s ability to meet its obligations.

He said reports published or disseminated by some media indicate seriously negative views which can be very damaging to the country. Due to heavy foreign currency borrowing over the past few years, there was adverse speculation, even at the time of government formation in 2019/2020, about Sri Lanka’s ability to service its debt as it matures at short term. Despite such speculation, and amid the additional pressures from the Covid-19 pandemic on our tourism cash flows in particular, the government has reiterated its position to ensure that all of its external debt service obligations will be honored on time, thus maintaining Sri Lanka’s unblemished record. to meet all of its maturing obligations. “I believe it is in Sri Lanka’s interest to close the long-standing trade deficit of $ 10 billion, as it places Sri Lanka in a vulnerable position, through careful political action.

“In doing so, we would continue to honor our debt service obligations and avoid further damaging the country’s reputation and investor confidence in the Sri Lankan economy and financial system.

“We have also observed that certain politically motivated segments of the Sri Lankan community continued to fuel adverse speculation about the future development of the exchange rate and the government’s ability to meet its obligations,” the Minister said. governor, adding that such self-interested speculation is unwarranted and harms the public and the business community itself. These speculative comments naturally created an unnecessary short-term imbalance in the forex market between entries and exits.

He said import values ​​remained significantly high at a monthly average of US $ 1.7 billion in March, April and May 2021. The high import values ​​during these months show that importers, especially of essential goods, were not too inconvenienced as reported by the published media. Claim.

What the Central Bank is doing now with the participation of all commercial banks is judicious management of imports and foreign exchange reserves.

With cash flow set to improve over the next few months, the Central Bank will assess the national balance sheet and external macroeconomic conditions to decide on the future policy response.

As an interim solution to manage cash flow asymmetry, the Central Bank has worked closely with the banking sector to ensure that the stability of the foreign exchange market is maintained.

Regular meetings with key officials of the banking community are organized by the Central Bank, and the banking community has mutually agreed to manage their outflows in inbound, while prioritizing essential and urgent imports, and discouraging speculative orders.

It is such a cautious action by the banks that is being exaggerated by the vested interests. The actions taken by the banking community have been supported by the Central Bank of Sri Lanka through measures taken regarding mandatory conversions of export earnings and regulatory measures aimed at curbing speculative activity.

The Central Bank has enabled commercial banks and enterprises to borrow foreign funds so that the banking system can remain independent of official reserves to finance imports, thus supporting the national effort to continue the debt service process without disturbance. At present, our focus is on managing Sri Lanka’s debt service obligations.

“Our gross official reserves remain at USD 4 billion, without taking into account the SWAP stand-by agreement of approximately USD 1.5 billion with the People’s Bank of China. Although there may be short-term fluctuations in this level of foreign exchange reserves in the coming period due to government debt service, adequate funding strategies have been put in place to keep reserves at low levels. sufficient levels, through entry into the country.

“These include non-debt inflows expected within a short period of time for the government, in particular through its new investment arm, and other inflows to the government from multilateral and bilateral sources. “, did he declare.

Expected Central Bank inputs include the Bangladesh Bank’s USD 250 million SWAP facility expected this month, the Reserve Bank of India’s SAARC Finance SWAP facility of USD 400 million expected next month, and the Special Facility USD 1,000 million SWAP being negotiated with Indian counterpart.

These are in addition to the receipt of around US $ 800 million in SDR allocation from the IMF expected in August, and the Central Bank’s purchase of export earnings and remittances. workers in the market, which would help the Central Bank to build official reserves through non-debt inflows of about $ 700 million per year over the coming period.

Measures are also in place to encourage resident holders of maturing Sri Lankan international sovereign bonds to repatriate the proceeds of maturity.

It can be noted that 30% of future ISB maturities are held by residents. The banking and corporate sectors have also seen an increase in financial flows at concessional rates to support real sector activity.

Private sector entities are expected to raise funds from foreign counterparts taking advantage of the recent relaxation of foreign exchange regulations. Some of these contributions over the coming period should also increase the official reserve.

The recent enactment of legislation on the Colombo Port City Commission will also increase the inflow of non-debt foreign currency into the economy.

“Overall, I would like to assure the media, the public, the business community and the investment community that the currency liquidity conditions seen in the domestic market at present are temporary and are driven by activity. excessive speculative.

“We ask these operators in the market to remain calm and not to fuel undue speculation, which is not in the national interest, as careful handling of the situation without undue disruption, will result in a beneficial outcome. for the country as a whole, ”he said.

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